Gujarat HC: Taxability of remuneration/interest not claimed by partnership firm in the hands of partners
Fact and Issue of the case
With the writ application under Article 226 of the Constitution of India, the writ applicant/an assessee seeks to challenge the Notice issued by the Income Tax Department dated 31.03.2018 under Section 148 of the Income Tax Act, 1961 (for short ‘the Act, 1961) for reopening of the assessment under Section 147 of the Act with respect to A.Y. 2011-12.
It appears from the reasons recorded by the Income Tax Officer that the department intends to reopen the assessment on the ground that the writ applicant herein as one of the partners of the partnership firm, failed to show the remuneration and interest received from the partnership firm when the return of the writ applicant was processed under Section 143(1) of the Act on 06.03.2012. The case of the department is that the total remuneration and interest paid is to the tune of Rs.75,11,147/-. Each of the partners have a share of 50% in the partnership firm. The writ applicant herein has been shown as a “Working Partner”. The writ applicant filed her objections dated 28.10.2018 pointing out that she had
not received any income in the form of remuneration and interest from the partnership firm and therefore, there was no question of adding some income or showing such income in the return of income.
The objections raised by the writ applicant came to be disposed of vide the order dated 01.11.2018 on the ground that the writ applicant/assessee had received share of profit from the firm and such share received by the writ applicant/assessee as per the partnership deed would include the remuneration and interest which has not been debited from the profit and loss account of the firm.
Observation of the Tribunal
The ITAT adjudicated the controversy as regards the deduction of remuneration/interest on the partners capital not claimed by the assessee i.e. the partnership firm in its profit and loss account. The Tribunal took notice of the fact that the CIT Appeals had directed to tax the amount of remuneration/interest on the partners capital account in the hands of the partners. The AO had allowed the claim of the deduction for the remuneration/interest on the partners capital account however, the same was added back by the AO on the ground that it was not claimed as a deduction in the profit and loss account. The CIT Appeals directed to delete the addition made in the hands of the firm and further directed to tax the same in the hands of the partner of the firm. The aforesaid was not approved by the Tribunal taking the view that there was no good ground to tax the remuneration/interest on the capital in the hands of the partners and the CIT(Appeal) could be said to have exceeded its jurisdiction by issuing such directions to the AO for the dispute which was not arising from the order of the AO.
In view of such findings recorded by the Appellate Tribunal, nothing survives in the present matter so far as the reopening of the assessment of the partner of the partnership firm is concerned. At this stage, Mr. Soparkar, pointed out that a Coordinate Bench of this Court while issuing Notice vide order dated 28.11.2018, had directed by way of ad-interim relief that the final order shall not be passed without the permission of the Court. However, the final order of assessment ultimately came to be passed. In such circumstances, the Co-ordinate Bench vide order dated 04.10.2021 directed that there shall be no coercive action inclusive of penalty in connection with the order of the assessment. In view of the aforesaid, even the final order of assessment will have to be quashed and set aside.
In the result, this writ application succeed and is hereby allowed. The impugned Notice dated 31.03.2018, Annexure – A to this writ application, is hereby quashed and set aside. The final order of assessment dated 25.09.2021 is also hereby quashed and set aside.
The Court has disposed off the application and ruled in favour of the assessee